Business columnist

'The tie-up with Emirates is a big step in the right direction.' Photo: Ben Rushton

QANTAS boss Alan Joyce reckons the company is at an ''inflection point'' in its transformation from an airline plagued by patchy divisional performances to an integrated conglomerate of airline brands, all which make solid returns.

Not surprisingly, this is the glass half-full version. The half-empty version is that the airline is in the middle of the perfect storm, and getting through it will involve plenty of work.

If the sharemarket is the arbiter, the glass half-fulls have it. At the very least, the stock price experienced a positive response when Qantas released a series of announcements on Thursday.

The prospect of Qantas whittling down its debt by $650 million and engaging in a share buyback, albeit a smallish one, came as a welcome surprise.

Shareholders always take well to some capital management. In particular, they love extra dividends, but because Qantas does not have any excess franking credits. This was never going to be an option.

Instead, it used some excess cash from Boeing compensation payments and the sale of the Star Track freight business to pay back debt and buy some of its own stock.

The company takes the view that the stock price undervalues the book value of its businesses, which include Jetstar and Frequent Flyer.

Thus buying back its own stock is a better investment than buying another business or ploughing capital back into its own operations.

And given that highly geared companies with volatile earnings are an unpopular mix in today's uncertain environment, using its cash to pay down debt makes perfect sense.

Meanwhile, the buyback provides a sense to the market that Qantas is sufficiently confident in its strategy to revive earnings that it will not require the cash from the sale of Star Track as a buffer against lean times. In other words, the company is confident the work it is doing on fixing the international business will gain some traction.

Certainly, the tie-up with Emirates, which gives Qantas the use of a phantom network, is a big step in the right direction from a financial perspective. This was the focus on Thursday.

Meanwhile, Joyce told the market that in the first half this year, underlying profit would range between $180 million and $230 million. At first blush, this seems to stack up fairly well against the expectations of the analysts looking for $149 million to $220 million.

But reading the company's underlying performance is not all that simple. There is the underlying profit forecast that Joyce spoke of, and then there is the ''underlying, underlying profit'' as Macquarie Equities analyst Russell Shaw called it.

The forecast by Joyce for the current half to December includes a payment of about $135 million from Boeing. Qantas was upfront about this, but if one is to get a true gauge of performance it should really be backed out.

To do so would leave Qantas with a more meagre performance for the current half, of $30 million to $80 million.

In the previous corresponding period (the first half of financial year 2012) the company made $202 million.

But that was after taking into account $194 million of losses associated with the industrial relations action and the grounding of the fleet. Without that anchor, Qantas would have made closer to $400 million profit.

Thus if one strips out all these factors and takes the earnings back to the bare bones, the 2013 financial year is not shaping up to be a good one.

The good news is that Qantas will make some headway in stemming the losses from its international mainline business.

In the first half to December 2013 the work done on this will improve profits by $50 million, and in the second half it would get another $100 million.

The biggest plank in the international recovery strategy is the tie-up with Emirates.

While this partnership is yet to be approved by the Australian Competition and Consumer Commission, there is a broad expectation that it will tick the right boxes.

The flipside is that the domestic operations appear to be suffering more than many had expected. Joyce made it plain right from the start that engaging in a capacity war with Virgin would be costly, and he was right.

How painful this will be depends on when it finishes. To date it has played havoc with yields and has been a bonanza for passengers looking for cheap fares.

The growth in capacity appears to have started to ease, which could allow growth in demand time to catch up.

If Joyce is concerned about this outcome of this capacity glut, he isn't showing it.

He knows it is unsustainable, but points to several similar battles over the past 12 years.

The 2000 war took the life of Ansett, which was already in a parlous financial state. Those in 2003 and 2008 were ultimately resolved as the players took a more practical commercial view.

This time around, the Qantas and Virgin capacity war was triggered by Virgin's move to grab a larger share of the business market, and Qantas' fight to retain its 65 per cent share of the overall market.